Magic? Or Alchemy?

I've spoken before about the problems of the Pension Benefit Guaranty Corp. (PBGC), problems which today affect many laid off or retired workers, problems that will eventually affect us. Most of these problems are the result of underfunded pension plans. How these plans became underfunded was the subject of the last speech given by Bradley Belt, Executive Director PBGC, before submitting his resignation earlier this week. His speech was entitled "Through the Looking Glass: Adventures in Pension Land".

Pension accounting rules are one reason for the underfunding. According to these rules, a company can book the expected return on its pension assets. That's right, the word is 'expected', not actual. So, if the plan's managers determine that the pension assets should have an expected return on 10%, then the company can book that expected return, not the actual return. For example, let's say Joe's Airline had pension assets of $50,000,000. Joe figures he should get a return of 10% on these assets. Ergo, he can book a profit of $5,000,000. This can be done even if the assets have declined in value during the year. Make sense to you? Realistic accounting? I think not.

Smoothing is another accounting technique that screws the worker. Here the company can take part of its pension losses over time rather than when these losses occur. Thus, my pension fund can be hit by a $5,000,000 loss this year, but I need take a hit of only $1,000,000 this year and need not tell the workers of the full $5,000,000 hit.

Companies need to compute the present value of their pension liabilities. That is, what is the amount of money they need today to meet their obligations some years hence. The companies do not have to predict tomorrow's interest rates; they can use the four-year average of a corporate bond index. As Belt says, "This is akin to driving down the highway at a high rate of speed looking only in the rear-view mirror."

One example of the "magic" wrought by this approved accounting is Bethlehem Steel. When it went bust, it owed business creditors $1 billion; its workers were owed $7 billion in unfunded pension debt.

Yes, our legislators will soon have a revised pension funding bill. Will the bill demand more realistic accounting?